Microsoft Takes IP Argument to EU Appeal

Microsoft's next days in a European court to request suspension of
anti-competition penalties may be more critical than the appeal itself.

On Thursday, Microsoft lawyers are expected to troop back to court in Brussels for
another step in what promises to be a years-long process. In a hearing
before Judge Bo Vesterdorf of the European Court of First Instance,
Microsoft will ask that an antitrust judgment against it for abusing monopoly power be
stayed until the appeal is completed.

In March, the European Commission levied a
$613 million fine on the company, rebuking it for stifling competition and
shutting out rivals in the server and media player industries. The EU's
regulatory body also ordered Microsoft to offer a version of Windows that
didn't include Windows Media Player and to open its APIs to
rival server software makers.

The appeal will be heard before a panel of three judges in the Court of
First Instance, a body that handles actions brought against the EU or its
commissions, including requests for annulment of their rulings. Both the
Commission and Microsoft could appeal the Court of First Instance's decision
on both the original penalty and the suspension of penalties to the European
Court of Justice, the highest court of the EU.

But Vesterdorf alone will decide whether to force Microsoft to comply
with what the company has characterized as compulsory licensing of its
intellectual property or let Redmond continue its bundling strategy past the
launch of Longhorn, its next-generation operating system, expected in 2006.

Vesterdorf is inclined to side with intellectual property owners, rather
than the interests of competition, said Frank Fine, an attorney specializing
in EU competition law. Fine represented NDCHealth, a U.S.-based provider of software
and research to the healthcare industry, before Vesterdorf.

The NDCHealth case was related to actions by IMS, the world's largest provider of pharmaceutical market research, which had
developed a proprietary system for dividing Germany into regions and
providing aggregated data about drug sales by region. When NDCHealth tried
to enter the market, it found that pharmaceuticals companies would only buy
data that conformed to IMS' format -- but IMS wouldn't license the format.

In 2001, the European Commission ruled that IMS was abusing its dominant
position to lock out competition, just as it decided Microsoft had. It
ordered IMS to license its format, as it ordered Microsoft to license its
server protocols.

When IMS appealed to the Court of First Instance, Vesterdorf
suspended the penalty pending the appeal trial. On Thursday, Microsoft will
ask Vesterdorf to let it off from opening the server APIs and detaching
Media Player from Windows.

"Judge Vesterdorf showed in his suspension hearings in [the IMS] case
that he was prejudiced toward the IP owner," Fine said.

Fine said that Vesterdorf's IMS ruling found that, even though IMS had 90
percent of the market for pharmaceutical sales research, upholding the
Commission's penalty would destroy innovation.

Microsoft would hope that Vesterdorf would show the same approach to its
own IP rights.

However, in April, the European Court of Justice, the EU's highest court,
overruled Vesterdorf and let the IMS penalty stand, narrowing the definition
of when market domination crosses the line and becomes abuse.

"The implication of that ruling is that IP rights are not sacrosanct," he
said. "Because of the ECJ ruling on our case in April, it's going to be hard
for Vesterdorf to play that game again. He can't say that IP rights are
sacrosanct. He can't say, 'Even though you have 90 percent market share, I'm
going to protect your IP rights above everything else.'
He's going to have to play it straight."

Fine said that if Vesterdorf suspends the penalties, the European
Commission will appeal to the ECJ, which could reverse his decision.

Handicapping The Media Player Market?

European consumers aren't anxiously awaiting a Media Player-free version
of Windows, said Paul Jackson, a senior analyst in the Amsterdam office of
IT research firm Forrester. "Most European consumers view the EU in same way
that U.S. consumers view the federal government. The public is largely
indifferent." Jackson said EU consumers, like those in the States, view the
operating system as a commodity, something that comes along with the
computer.

But some in the tech industry agree that the case has potentially huge
implications -- even if they don't agree on how the court should rule.

Microsoft will argue that forcing it to open its server APIs to rivals
will cause this intellectual property to lose most of its value. It also
will claim that such a ruling would stifle innovation: Other companies would
not be willing to spend money on research and development of new products if
they thought they would be forced to license it or disclose it to others.

"There's been a great deal of interest in industries and among European
companies over the potential ramifications of the commission's decision,"
said Microsoft spokesperson Jim Desler. "We've had companies contact us, and
it's come up in our ongoing dialog on other issues with other companies.
Given this interest, there have been some companies that have expressed
interest in intervening on behalf of Microsoft in this process."

Boeing was asked by Microsoft to support its
position and agreed to consider the request, a Boeing spokesperson
confirmed. The company ultimately decided against getting involved,
declining comment on its reasoning.
Airbus, the French consortium, did file a brief on Microsoft's behalf,
according to news reports.

Another organization, CompTIA, has weighed in on Microsoft's side, filing
a brief urging the penalties be suspended and the ruling overturned. CompTIA
is a trade association with over 16,000 member companies in the hardware and
software industries. Microsoft is one of 17 members of its public policy
board of directors; a spokesperson said that the company contributes less
than 5 percent of the organization's operating budget.

The issues in the case are related to an antitrust policy statement that
CompTIA adopted a few years ago, said Lars Liebeler, the organization's
antitrust counsel, who will testify during the suspension hearing.

"This action of the Commission favors competition enforcement too much
over intellectual property. The results are profoundly negative for the
whole industry."

While pulling in allies is a tactic Microsoft used in the U.S., Europeans
are more solicitous of third-party points of view, said Mark Ostrau,
co-chair of the antitrust practice at the law firm Fenwick & West.

"When the Court of First Instance considers the suspension, they're not
immune to thinking about where they're going to go ultimately," he said.
"It couldn't hurt Microsoft in this way, but it may have limited
usefulness." He said Airbus's involvement could sway the court, because the
company is one of the EU's commercial success stories, whereas Boeing's
opinion might not seem relevant.

If Microsoft could dig up customers or other vendors in its technology
supply chain to explain exactly how the penalties on Microsoft would harm
them, that would have the greatest impact, Ostrau said.

CompTIA pointed to a study of eight Latin American markets that showed
that for every 10 percent decline in software piracy rates, gross investment
in IT capital increases. Although the study does not make a connection
between software piracy in Latin America and piracy in the EU, CompTIA's
brief argues that compulsory licensing of IP would have the same effect in
Europe. "If the main proceeding extends for a considerable time as it is
expected to do, the reduction in IT research and development investment
during that time is likely to cause great harm to innovation in the
industry," it said.

CompTIA's Liebeler couldn't give an example of a situation in which fears
about a lack of protection for intellectual property caused a company to
spend less on R&D. "It's a subtle process, it happens day by day,"
he said. "The venture capitalists who start new firms and R&D executives in
existing firms are making decisions every day about what the legal landscape
is, whether they're likely to have an investment recouped."

Ostrau is not sure how well this argument will play with Vesterdorf, or
with the full court. "The European court of Justice has already gone on
record acknowledging that IP is not sacrosanct, that there might be
situations in which it needs to be shared," he said.

Going Playerless?

Microsoft also will argue, as it did in the U.S. Department of Justice's
antitrust action against it, that the Media Player is part of the operating
system and should not be separated. Microsoft has shifted its position a
bit, no longer claiming that the media player can't be separated.

In August, Microsoft introduced Windows XP
Starter Edition, a lower-cost version of the OS from which some features
have been removed.

"If the court concludes that we must implement the Commission's decision,
we of course will comply with the Court," Microsoft's Desler said, when
asked if Microsoft could provide a playerless version of the OS.

In its supporting brief, CompTIA said that because the software industry
relies so much on the Microsoft operating system, creating a version of
Windows without the Media Player "will force software developers to expend
vast amounts of resources to ensure that their products will interact and
operate properly with the new operating system. The net result of the
creation of a different version of Windows that does not perform all the
functions of a full-feature Windows is that many complementary pieces of
software may not operate properly."

"Unbundling the Media Player is the most straightforward aspect," Fine
said. In his opinion, it's clearly a case of tying two products together, a
practice that frequently runs afoul of antitrust laws. "I don't think
Vesterdorf has an ideological slant on that, and Microsoft faces a real
risk," he said.

The hearing on suspending the penalties is expected to take two or three
days, with a ruling expected in four to six weeks. Microsoft already has
paid the fine and stands ready to license the APIs and provide an alternate
version of Windows.

Said Microsoft's Desler, "We are very confident in our case as we enter
the Luxembourg hearings and believe that the Commission's decision would
represent a bad precedent for European consumers and companies."

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